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EUV – So late to the party it may already be over!

EUV – So late to the party it may already be over!
by Robert Maire on 09-29-2015 at 12:00 pm

Stocks in the semiconductor equipment space continue to fall only this time along with the broad market. We had recently pointed out that LRCX was the last to fall among the large cap companies in the space but now the question becomes when have they fallen enough to say its over, and which stocks have more to fall……

ASML stock always at a premium…
We have always had an issue with the apparent premium that the stock of ASML trades at. Although it clearly deserves a premium due to its margins and market dominance the premium it commands versus its US peers was well beyond just those factors. It seem obvious that there is clearly a “scarcity” premium of European investors looking for large cap technology companies that keep ASML at a much higher than industry average due to a lot of money chasing too few stocks with few alternatives. As alternative European technology companies such as Nokia and Ericsson have fallen so has ASML gained. We see a similar issue propelling some Asian technology companies to well above US equivalent valuations, such as Hermes. (US semi equipment company management has always had a bit of P/E envy over this valuation differential….)

How Much of a Premium?Not worth a Double…
ASML seems to command more than double the valuation of similarly situated US companies such as AMAT, LRCX & KLAC. ASML trades at a forward P/E of about 18 versus 9 for LRCX, 10.5 for AMAT and 11.7 for KLAC. On a price to trailing twelve months sales ASML trades at 5.3 versus 1.9 for LRCX, 1.8 for AMAT and 2.7 for KLAC. Obviously all these ratios will change as earnings are likely to drop for everyone in the industry along with a slowing of revenue as the downturn takes hold.

ASML has the potential to fall further than US counterparts…
Even if we presume a deserved quality premium versus US counterparts and a European stock premium there is still likely excess air in the valuation of ASML shares that could come out if we continue to see a capitulation of the sector and compression of valuations. At this point one could argue that European stocks deserve a discount rather than a premium.

A Pair trade with the US?
If I were a US shareholder the obvious question is why should I continue to hold ASML at such lofty valuations when I can buy similar US companies at half the price. I could further argue that a pair trade short ASML and long a US counterpart might not be such a bad way to hedge the market in the near term volatility given the valuation differential.

ASML fundamentals no better than anyone else… maybe worse?
There hasn’t been a whole lot of news in a relatively long time about the progress of EUV. The last thing we heard was an alleged 15 unit order over the span of several years purported to be from Intel. But that was before Intel stretched out its technology cadence from 2 years to 3 years and has continued to lower its capex, so the true value of that order is likely a lot less than the initial investor reaction.

Nor have we heard about anyone about to put EUV into production or production throughput getting to high volume manufacturing levels. In fact we continue to hear a “buzz” in the industry that other chipmakers, in addition to Intel, have process flows for 7nm that work just fine without EUV barring some major breakthrough we could very well see 7nm start out without EUV (or very much of it). ASML’s expectation that they will get some process steps or get in on the end of 10nm is starting to feel shaky.

The near term memory spending concerns at chip makers such as Samsung certainly impact ASML at least as much as its US counterparts. These concerns continue to echo in the stocks. ASML has significant exposure here in its current scanner offerings.

Memory may never go EUV…
Given that current memory technology line widths are well behind logic and foundry we would be hard pressed to find a memory maker that has EUV anywhere in its plans in the near term let alone long term plans. Given the spending patterns this suggests that EUV is shut out of at least half the market spenders.

So where is the EUV upside?

EUV is a very, very daunting task and we admire that ASML has continued to stick with it but you have to wonder. EUV has been in the works for such a long time, it goes all the way back to Bell Labs (remember them??) The question is will there be a payback??

Back in 2001 when the industry was running .25 micron (250nm for you newbies…) and Intel just announced .13 micron plans it was thought that EUV would start at about .07 micron (70nm) and perhaps EUV could be pushed as far as .03 micron (30nm) and if we were really lucky perhaps even stretched to .007 micron (7nm).

Fast forward almost 15 years and here we are wondering if EUV will even get introduced for the 7nm node….
The reality is there likely aren’t all that many nodes left in the semiconductor technology path after 7nm to try to recover the huge expense of developing EUV before we likely move on to some new non traditional technology to try continue Moore’s Law which may or may not require the same litho tools.
In the end , EUV could still be a losing bet even after the industry has doubled down several times…..

The figure above is a copy of the original Wall Street Journal article from 2001 about the advent of EUV. We found this ancient yellowed copy in our archives. (Yes, I am a pack rat who has files going back to our involvement in the IPO of ASML 20 years ago in 1995). Here is a link to a more legible copy of the article: Wall Street Journal 2001 EUV article

We dug the article up when we read this past weekends article in the Sunday NY Times about Moore’s Law slowing which also talked about lithography issues:Sunday 9/27 NY Times article about lithography & Moore’s Law slowing

Robert Maire
Semiconductor Advisors LLC

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